Much political debate raged in recent months (and years) about the federal gift and estate tax. While most of you have likely heard of the controversy, many of you are not exactly sure how these taxes could affect you and whether or not you need to do anything now to take advantage of current rates.
The IRS defines the estate tax as “a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death”.
The gift tax “is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not”.
Both of the above have definitions have one thing in common: both are taxes on the transfer of assets to another–either as a gift during your lifetime or an inheritance left after your death.
The Changes to Come
Policymakers have long disagreed about what the tax rates should be for gifts and estates and at what dollar amount the tax should kick in (only those passing on gifts or an inheritance above a certain dollar amount have to pay the tax).
Congress last spoke on the matter in 2010 and passed a historically high $5 million exemption threshold for both the estate and gift tax. But this measure is only scheduled to last through the end of 2012, with lawmakers presuming that Congress would have enough time to enact a comprehensive and permanent tax reform by the end of this year. Upon the scheduled expiration of the 2010 changes to the estate and gift tax, the exemption will return to the level it was prior to 2010 unless Congress enacts new tax rules.
Regrettably, Congress has been unable pass any permanent estate and gift tax rules thus far and making it highly doubtful that anything will change by the end of this year. That means that at the end of the year the exemption rate will plummet to its pre-2010 level and many more people will be affected by these taxes if they do not act now.
No Time to Wait
If you haven’t already taken advantage of the tax bargain, there is still time to make it happen. For the rest of the year it is possible for you to give away up to $5,120,000, without gift or estate tax liability (that is $10,240,000 per couple). In our area we recommend you contact a San Diego estate planning attorney to understand how the tax situation applies to you and to present you with a tailored estate plan.
It is important to remember that you do not need to pass away in order to take advantage of the current tax situation. Assets can be given to intended heirs right away. However, an outright gift comes with certain risks, such as compromising a lifetime of saving, but with proper estate planning, donors can avoid such risks. For example, trusts can be used so the one receiving the gift does not have immediate access to your assets, and you still take advantage of the favorable tax exemption levels.
Many options are available; you simply need to visit a legal professional to determine what is right for you. Take a moment to reach out to an estate planning attorney today to receive that tailored assistance.